Good and Service Tax – Is The Time Ripe for Tax Slab Rationalization?
The current GST regime was introduced on 1 July 2017, however, its genesis can be traced back to the year 2000 when the then Prime Minister of India Shri Atal Bihari Vajpayee introduced the concept of GST. He set up a committee to oversee the design and development of a GST regime in India, as GST was gaining popularity around the world, particularly in developing countries. The GST regime now in force has replaced many central and state taxes and has brought in the concept of “One Nation One Tax” to unite various indirect taxes under one umbrella. India has adopted the dual GST model, allowing both the centre and the state to divide tax from sale of a good or service, drawing from the GST systems followed by countries like Canada and Brazil.
In the Indian GST setup, there are multiple tax rates under which various goods and services are classified. Most goods and services are covered in one of the four rates of taxation (5%, 12%, 18%, 28% and additionally 0.25% for precious stones and 3% for gold) along with several exemptions. Items are identified as Harmonised System of Nomenclature (HSN Code) for goods and Service Accounting Code (SAC Code) for services. Apart from the tax slabs stated above, certain exemptions have been provided and various commodities are kept in the zero-rated slab, making the GST classification very complex for a common man. For example, for businesses such as printing, supply of printed magazines falling under HSN 4902 are taxed at 0% whereas the PDF file of the same would attract 18% tax with classification under SAC 9984. Similarly, supply of physical pamphlets is taxed at 5%, and letterheads at 18%. Such dynamic rate structure applies to almost all industries becoming a big hindrance in compliances. The return filing process requires matching of invoices on both sides of the transaction and a second return is generated for any mismatches in the invoices. When these mismatches are corrected, the final return is filed. All this information requirement in a prescribed format requires the services of an accountant as well as the software to prepare them.
The Indian GST regime is particularly complex as it tries to account for the socio-economic disparity and its influence on consumption of various kinds of goods and services. While goods and services falling under essential commodities are taxed at lower rates, certain luxury goods, on the other hand attract higher rate of taxes, along with compensation cess in some cases. Another matter of concern is the regular reclassification of goods from one rate to another. The GST council keeps on updating the list of goods falling under different tax slabs and this creates problems for taxpayers and tax consultants alike.
The World Bank has pointed out that India’s GST regime is the toughest globally with not just the highest tax rates but also the maximum number of tax slabs. It has pointed out that India is among the five countries (Italy, Luxembourg, Pakistan and Ghana) that have 4 tax slabs as against around 49 countries that have just one and another 28 countries that have two slabs. For better understanding and for ease of comparative analysis, the adoption of tax slabs under GST around the world is given here below:
GST was introduced in New Zealand in 1986 and the country observed a single tax rate of 10% until 2010 when it was increased to 15%. Since then, a provision has also been created to allow businesses to recover GST as an input tax. There is no GST on supply of certain goods and services, such as private property, financial services such as interest payment on loan or bank fees, donated products and services sold by non-profit organizations, rentals of residential property, penalty interest, slump sale etc. Various activities are subject to zero percent tax such as exports, specified supplies of fine metals, proceeds from local authorities, supplies of land where both the vendor and purchaser are registered for GST. 
GST was introduced in Singapore in 1994 with a flat GST rate of 3% which was lowest in the market. With effect from 2007, the GST rate has been increased to 7% which is still very less compared to GST rates of India. Singapore still boasts the lowest GST rate and trade is not compromised either. Do note that Singapore has a GST compensation scheme for the disadvantaged segment of the society. One of the good practices we may pick is when it was first imposed 1994, the Singaporean government made clear that it would not hike the rates for next five years, creating a positive impact on the overall economy and people could spend without fear. The influence of Singaporean tax system can be seen in GST system introduced in Malaysia effective 1 April 2015, with a consistent flat rate of 6%.
The GST system arrived in Australia in the year 2000, charging at a flat rate of 10%, and replacing the federal wholesale sales tax and some state and territory taxes. To this date, Australia observes the same rate of taxation. GST is collected by the Federal Government and then divided further among the states thus, leaving no scope for conflict. Their destination-based GST is levied with exclusions, such as those on certain food products, health and medical services, education courses, childcare, slump sales, exports, religious services, precious metals, duty free shops and international mails, and are known as GST-free (other counties refer to these as zero-rated). Businesses are entitled to a credit for any GST paid for expenditures made on supply of goods and services, including capital purchases.
The concept of Federal Goods and Services Tax was introduced in Canada on 1 January 1991 replacing the Manufacturer’s Sales Tax. GST in Canada is applicable on supply of most goods and services, at the rate of about 5%. Almost all imports are considered taxable, whereas exports and supplies of goods and services relating to basic needs of individuals are taxed at the rate of 0% (zero-rated). Exempted supplies includes real property, healthcare, educational, child, legal aid, public sector bodies, financial services, tolls etc. The businesses can claim input tax credit on operating expenses.
Countries with more expensive GST Regimes
United Kingdom (“UK”)
GST in UK by the name of VAT was introduced in the year 1973 at a standard rate of 10%, which has now been increased to standard VAT rate of 20%. UK applies reduced rate of 5% and 0% to number of specified goods and services. Supplies like postage stamps, financial, property transactions, most food and children’s clothes are zero rated supplies under UK’s GST system.
The Brazilian model of GST introduced in 1984 is much more complex and expensive in comparison to other nations and has a dividing rule of taxes between the states and the centre. Brazil has two types of levy, i.e. state tax levied on the physical movement of merchandise at the rate of 17% to 20% depending on the state; and federal tax is charged – with a few exceptions – on all goods imported or manufactured in Brazil, at rates between 0% to 330%, averaging at 10%. State also collects tax on inter-state and inter-municipal transport services, communications and electricity at rates ranging from 4% to 12%.
There are about 160 countries in the world that have some form of Value Added Tax (VAT) and GST. While there is much talk of simplifying tax structures, from the data above, it is evident that advanced economies having a robust and evolved GST regime charge higher average rate of taxation and have greater number of slabs, whereas countries with newer GST regimes are adopting fewer slabs to encourage compliance amongst the smallest denominator and strengthen their revenue collection. For instance, GST rates in countries like Malaysia, Philippines, South Africa, and Thailand range between 5% to 14% on average, while developed countries like Italy, France and the United Kingdom charge higher GST rates varying between 20% and 22% on a majority of goods and services.
The Indian model of indirect tax system which is currently levied upon most goods and services has four major tax slabs with 28% being the highest. This is complex by the standards of a developing economy and is chipping away at the essence of one nation one tax. However, it is worth noting that in the four years since its inception, the Government has successively reduced the number of goods and services attracting 28% tax and brought more and more goods and services under lower tax slabs (5%, 12%, 18%). This is good policy and has positively impacted the economy, which is evident from monthly GST collections regularly breaching the one lakh crore mark. This data is also consistent with most economic research which seems to indicate that lower taxes encourage compliance leading to greater revenue collection, while higher taxes fuel rash, evasive behaviours.
Another idea which merits serious consideration is to bring a wider range of products within a lower rate of taxation instead of granting full exemption from GST. This will allow businesses to utilise input tax credit, while ensuring revenue neutrality for the Government. Interestingly, both, businesses and the Indian Government seem aligned on this. A simple tax structure can potentially reduce unwanted litigations where disputes arise due to overlapping coverage in different tax slabs. A robust tax system with minimal compliances will promote ease of doing business, encouraging small and medium enterprises to thrive which in turn will give a strong fillip to the Indian economy.
Since GST law is still evolving, it is far from perfect. the criticisms are valid. Our national institutions have spent the better part of two decades framing the ideal taxation system, and yet it is far from perfect. However, it is equally important to acknowledge that no single country has claimed a flawless GST since inception. A less-than-perfect GST which can be improved down the road is far better than the erstwhile complex system of multiple taxes, which prevented India from being a single market.
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Cite this Article - Bose R and Bhattacharya S, ‘Good and Service Tax – Is The Time Ripe for Tax Slab Rationalization?’ (Tax Terminal Blog, 14 July 2021) <https://www.taxterminal.in/post/good-and-service-tax-is-the-time-ripe-for-tax-slab-rationalization>
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